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Euro Chiefs Seeing Japan-Like Risks Keep Call for Stimulus Muted

Bloomberg logoBloomberg 3 days ago Nikos Chrysoloras and Viktoria Dendrinou

(Bloomberg) --

Euro-area finance ministers are poised to acknowledge their economy faces the danger of protracted malaise, though they may stop short of calling for wholesale stimulus to address it for now.

“The risk of a further prolonged period of low growth and inflation driven by anemic productivity and aging populations looms,” the finance chiefs will say in an “economic policy recommendation” for the currency bloc due to be adopted on Tuesday. “Fiscal policy needs to complement the monetary policy stance, as do structural reforms across different sectors.”

a close up of a map: Fiscal Future© Bloomberg Fiscal Future

Based on a proposal by the European Commission in December, the version of the document agreed this week calls for a “slightly” expansionary budget policy this year and next, while alluding to additional stimulus if the region’s outlook deteriorates. An official familiar with the talks said such wording may still change, with references to fiscal expansion further toned down or eliminated.

The lukewarm pledge to mobilize public funds would be made against the backdrop of an industrial recession in the bloc, with prospects for only “subdued” economic expansion in coming years. That may disappoint European Central Bank officials who want governments to help them out more, insisting monetary policy alone can’t lift stubbornly low inflation. Without such support, Europe could slide into longstanding decay similar to Japan.

“Further boosting investment and other productive spending in Member States with a favorable budgetary situation would support growth in the short and medium term, while also helping to rebalance the euro-area economy,” the document said, in a reference likely to be pointed most at Germany. “If downside risks were to materialize, fiscal responses should be differentiated, aiming for a more supportive stance at the aggregate level.”

Rule Review

Talks over such wording follow a recent review of the bloc’s draconian budget rules by the commission, in which the European Union’s executive arm highlighted how lack of coordination is undermining economic prospects. Countries fail to use good times to put finances in order, and tighten belts in bad times, further exacerbating downturns, it said last week.

That assessment by the commission is also due to be discussed by finance ministers on Monday, kicking off months of debate which could result in legislative proposals for revising the rules. The outcome is uncertain, with frugal Northern countries reluctant to agree to anything that would signal less budget discipline.

Ministers will also repeat their pledge to complete a series of reforms in the currency bloc, including a banking union and a joint deposit insurance guarantee scheme. Such promises ring increasingly hollow to skeptics, as talks on specifics have been moving glacially for years.

Other ambitious initiatives, such as joint “budget” for the euro area, were scaled down to an underwhelming “instrument” of less than 20 billion euros ($22 billion) spread between 19 countries over seven years.

Commitments in the recommendation which may result in more concrete outcomes include a shifting of the tax burden from labor to pollution. Environmental taxes “can be less detrimental to growth” and encourage “greener” behavior, ministers will say. Key among planned environmental levies is a “Carbon Border Adjustment Mechanism” that would penalize EU imports from polluters.

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To contact the reporters on this story: Nikos Chrysoloras in Brussels at;Viktoria Dendrinou in Brussels at

To contact the editors responsible for this story: Chad Thomas at, Craig Stirling, Paul Gordon

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